The bull case for Facebook: Yes, there is one

Unicorns. Little green men from Mars. The Loch Ness Monster. Investors who are proud to own Facebook (FB) stock. The first three don't exist. The fourth -- shockingly -- does.

Yes, Facebook had a monumentally messed up initial public offering. Shares are currently trading around $26.50, 30% below the offering price of $38. And those poor saps who got stuck with Facebook when it briefly looked like it was off to the races and hit a peak of $45? They're nursing a more than 40% loss ... assuming they still own the stock.

Many big institutional investors are still shunning Facebook -- I spoke with several last week who seemed to suggest that Facebook wouldn't even be close to fairly valued unless it dipped below $20. But I miraculously found two fund managers who invested in Facebook before the IPO ... and still like the stock.

Kevin Landis, chief investment officer for Fisthand Funds, an investment firm in San Jose that focuses on tech and growth stocks, owns 600,000 shares in his closed-end Firsthand Technology Value (SVVC) fund. (Closed-end funds are mutual funds that can be bought and sold like stocks.) Landis bought before the IPO and said his average price is about $31.50. So even he is sitting on a loss.

"We felt clever for awhile," he quipped.

Still, Landis remains a fan. In fact, he also bought a small position for his Firsthand Technology Opportunities Fund (TEFQX) after the stock made its public debut. He said he purchased those shares at $32.

Landis concedes that there are many risks surrounding Facebook. But he thinks that the two biggest -- that Facebook won't be able to generate significantly higher revenue from users and won't be able to successfully shift the site from the PC world to mobile -- are well-known and now priced into the stock.

It's easy to poke holes in Facebook's business model now that the stock is faring so poorly. But it wasn't that long ago that many experts felt that Facebook was a can't miss/once in a lifetime opportunity for investors. The company fell victim to hype, but Landis is quick to remind skeptics that Facebook is far from dead. He said he'd be more concerned about Facebook's future if any other company had been able to make a dent in Facebook's user base.

So far, that hasn't happened. MySpace supplanted Friendster and Facebook overtook MySpace. But nobody has yet been able to knock Facebook off the social throne. Google (GOOG) tried and is continuing to try. But Google+ hasn't become a viable competitor -- even though Google has a longer track record, more resources and a much bigger mountain of cash at its disposal than Facebook.

"Facebook is not getting credit for just how strong their franchise is. Google+ was probably the most competitive threat Facebook could have had, and that body blow could have hurt them. But it didn't really seem to slow Facebook down," Landis said. "If there was any company in the world Facebook should have been scared of, it was Google. Facebook is not going to be dislodged."

That's a fair point. But what about valuation? The best argument Facebook bears have is that the stock is still trading at an unreasonably high price. Shares are currently valued at a lofty 50 times 2012 earnings estimates.

But Thomas Vandeventer, manager of the Tocqueville Opportunity Fund (TOPPX) in New York, says that Facebook isn't as expensive as many investors make it out to be. Vandeventer owns Facebook in the fund (it's one of his 10 largest holdings) and also purchased his stake when the company was still private. He said his cost basis is about $32, and that he has added to the position since the IPO.

Vandeventer thinks Facebook is still a young enough company that it makes more sense to value it on a sales basis, as opposed to earnings. He also noted that Facebook -- like Google, Apple (AAPL), Microsoft (MSFT) and many other big tech companies -- has a lot of cash on hand. Investors in those companies typically subtract the cash when looking at valuations in order to get a handle on what investors are paying for the core business.

Facebook said in its last regulatory filing before the IPO that it expected to soon have around $10.3 billion in cash, factoring in the money it was raising through the sale of its stock. Facebook's current market value is about $56.6 billion -- although that does not include shares that are likely to be issued once options are exercised. Subtract the cash and you're left with a core market value of $46.3 billion.

Based on estimates that Facebook will generate revenue of nearly $6.5 billion in 2013, Facebook is trading at around 7 times sales, which Vandeventer said is a comparable multiple to what Google and LinkedIn (LNKD) traded at around their IPOs.

Is this a complicated justification for what is still a pricey stock? Perhaps. But Vandeventer makes a good point about how Facebook is still in very strong financial shape, despite all the doom and gloom headlines about its stock price. Most public companies would kill to have $10 billion in cash at their disposal.

What's more, Facebook is an incredibly profitable company. Sure, growth is slowing. But operating margins of 36% in the first quarter and net margins of 19% are nothing to sneeze at.

"Momentum may be going the other direction right now, but Facebook has one of the highest profit margins in the business," Vandeventer said.

Finally, Vandeventer thinks concerns about mobile are way overblown. He notes that Facebook has said only 83 million of its more than 900 million users access the site exclusively through mobile devices. In his view, most users still use the desktop when they really want to spend a lot of time on the site.

Personally, I still think Facebook doesn't deserve its current valuation. I am not alone.

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But smart people are making bets that the company will recover from its awkward beginnings as a public company. In fact, two of the world's largest mutual fund firms -- Fidelity and T. Rowe Price -- own Facebook in dozens of funds. Representatives from both firms said their analysts were not commenting on the stock right now.

Facebook can't keep falling forever. Or at least, it shouldn't. I'm not sure what catalyst is on the horizon to get investors excited again. But maybe, just maybe, Facebook will prove all the skeptics wrong with a strong second-quarter earnings report sometime next month or early August.

It would be fitting given that pretty much nothing has gone as expected with this IPO.

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.